By Gareth Vaughan
The man who'll be overseeing UDC Finance on behalf of China's HNA Group should its takeover go through, says overall funding costs shouldn't increase under UDC's new owner, but given a different - higher - risk profile for the finance company, any deposit rates offered to the public will need to be "competitive."
HNA Group, a sprawling Chinese conglomerate, is buying UDC from ANZ for NZ$660 million, with the deal expected to be finalised later this year. Credit rating agency S&P Global Ratings says it could downgrade UDC's long-term rating as low as B+ (junk) if the sale goes ahead, having already downgraded UDC to BBB (its lowest investment grade rating), from AA- which was equalised with parent ANZ. (See credit ratings explained here).
Bob Fast, the president and CEO of the HNA Group owned TIP Trailer Services under whose umbrella UDC will sit, told interest.co.nz in a Double Shot interview that, despite the downgrade, he doesn't expect UDC's overall funding costs to rise. UDC's currently funded through a public deposit, or debenture, programme, and via an ANZ loan. Fast says under TIP-HNA ownership the plan is for UDC to be funded via a debenture programme and through asset securitisation.
"Probably in the next three to four weeks we'll be able to announce that [funding plan] more clearly," Fast says.
Asked whether UDC investors could expect significantly higher interest rates following the S&P downgrade, Fast says he didn't think so.
"If you look at securitisation it's based on the assets and the quality assets in the programme. So we don't expect a higher interest rate than we've got today frankly," says Fast.
"If you look at TIP we were also bought by HNA and we were part of GE Capital, which had a very high credit rating. We're still financing it at the same rates that we were prior to the acquisition. We've grown our asset portfolio by about 20% per year over the last three years so I don't see any real issue out there."
"And I think in terms of the debentures, again UDC is a standalone, separate entity from HNA and anybody owning debentures today would be well placed and well positioned to own debentures in the future," Fast says.
TIP and UDC do acknowledge, however, that given UDC's likely to have a different risk profile once under new ownership, deposit interest rates "will need to be competitive in the market." UDC was advertising a 3.45% six month deposit rate, 3.75% nine month rate, 3.8% 12 month rate, 3.75% 18 month rate, and 4.15% per year for its five year rate. However, UDC yesterday (Thursday) stopped accepting new applications for term deposits.
ANZ and UDC say as part of the sale there will be a meeting for the about 13,500 UDC debenture holders to vote on winding up the existing debenture plan. The debenture book, which is secured by $2.8 billion worth of assets pledged as collateral, stood at $1.30 billion at March 31. That's down from $1.6 billion at September 30 last year. UDC also has a $1.8 billion loan facility with ANZ. As of September 30 last year, $595 million was drawn down with UDC paying an interest rate of 3.07%. The September year interest expense for UDC stemming from its secured debentures was $68.5 million, and $18.4 million from its ANZ loan.
'UDC to be operated as a separate entity'
New Zealand's biggest finance company with total assets of about $2.7 billion and annual profit after tax of $58.5 million, UDC specialises in asset finance and car loans. Fast says that will continue. The UDC name will also remain. And the company is increasing staff by about 50 to about 200, in part recruiting to cover work that's currently done by ANZ staff on UDC's behalf.
The Amsterdam-based TIP Trailer Services is one of Europe and Canada’s leading equipment service providers and has been growing rapidly, operating in 17 countries and 80 locations, and with assets reaching €1.35 billion as at December 2016, up from just €1 billion the year before. Turnover last year was nearly €450 million, up from €370 million in 2015 and the target for this year is €500 million, with a target of €1 billion for 2020. Profits have not as yet matched the strong turnover and asset growth, with reported net profit last year of €15.6 million, down from €24.6 million the year before.
"UDC will be a separate company, it'll roll up under global TIP Holdings, which is the TIP Trailer Services holding company. But it'll be operated as a separate entity by a board and managed by [CEO] Wayne [Percival] and the team locally, and then reporting into a board," says Fast.
HNA was attracted to UDC because it likes to acquire businesses with leading marketshare, and with strong management, Fast says.
"The focus is really going to be to continue to grow the business. I think Wayne and the team have done a super job over the last few years continuing to grow the business. I think we plan to invest further, grow faster. We've already hired a number of people. We repatriated a back office team from India here, and now we've taken on new sales and marketing personnel, and our view is to grow the business very substantially," says Fast.
It's also possible, Fast says, that UDC, its systems or management could be opened to pastures new overseas.
'Hopefully it [HNA's relationship with the Chinese government] is a good one'
HNA has come under scrutiny recently. Having grown exponentially from a regional airline founded in 1993, HNA's global acquisition spree has raised eyebrows and led to questions about exactly how it funds its acquisitions. HNA Group, chaired by Chen Feng, has also seen its relationship with the Chinese government questioned.
A recent New York Times article on HNA Group notes the company has embraced the Chinese government’s push to “go global” and invest overseas, focusing on shipping, hotels, logistics and retail. HNA's now also the biggest investor in Deutsche Bank. This acquisition spree has seen HNA amass a US$145 billion portfolio having spent more than US$30 billion over the last three years. According to the NY Times, Chinese government controlled banks have given HNA a US$60 billion line of credit, a scale of funding usually reserved for state-owned enterprises.
Fast says a number of private shareholders own HNA.
"There are a couple of foundations in there, a couple of different funds. So it's a pretty broad based ownership. In terms of HNA, yes it's a pretty big company but focused in a few key areas. It's a conglomerate, but really focused on a couple of areas around tourism which includes aviation, hotels, etc, HNA Capital which is another big part of the group, and then logistics areas," says Fast.
Asked about the relationship between HNA and the Chinese government Fast says, "Hopefully it's a good one. And hopefully it's a good one again with New Zealand, with Australia, with Amsterdam, the US and all the countries where HNA operates."
ANZ says it expects HNA to be a good owner of UDC.
Meanwhile, Fast says HNA has filed its application to acquire UDC with the Overseas Investment Office and expects to hear back soon, probably in June. In terms of Reserve Bank of New Zealand approval for the deal, he says this is required if TIP/HNA decide to go ahead with a public UDC debenture programme.
"I think we're going to. But I think we'll know a bit more clearly in the next few weeks," Fast says.
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